Rachel Tan and Derek Tan of DBS Group Research have kept their "buy" call and 35 cents target price for OUE LJ3 REIT, as they expect recovery to continue and therefore further upside for investors.
For its FY2023 ended Dec 2023, the REIT reported a distribution per unit of 2.09 cents, down 1% over the preceding FY2022, as the REIT manager chose to retent a higher quantum of working capital.
For its 4QFY2023, its revenue was up 7% y-o-y to $70.5 million and net property income was up 4% y-o-y to $57 million, mainly due to higher contributions from Hilton Singapore Orchard (HSO).
However, compared to the preceding 3QFY2023, revenue and net property income were down 7% q-o-q and 9% q-o-q, respectively, mainly due to lower contributions from hospitality.
Despite a softer 4QFY2023, management is optimistic about 2024 and believes that there’s still upside for hospitality, riding on the major concerts and MICE events, especially in the first half of the year.
"In addition, management believes that more Chinese tourists will return, especially with the 30-day visa-free travel," adds DBS in its Jan 31 note
OUE REIT is upbeat about its office segment will enjoy resilient rental given the lack of supply. It expects to achieve mid-single-digit positive reversions in FY2024, given the expiring rents of $10.43psf. It does not expect major risks from its top 10 tenants in the near term, as most of the leases were renewed over the past year.
While OUE REIT is mulling potential acquisitions to grow its hospitality sector, the preference for now is to look at ways to recycle its assets before pulling the trigger.
Meanwhile, despite a softer quarter for the key hospitality asset Hilton Singapore Orchard, the DBS analysts continue to believe that OUE REIT can still ride on the growth in the hospitality sector and deliver core DPU growth, which, in the absence of refinancing risks this current FY2024, should see growth of 1% to 5%.
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DBS has trimmed its FY2024 and FY2025 DPU estimates by 1.6% to factor in higher retention of distribution.
OUE REIT now trades at close to an 8% FY2025 yield, 0.5x P/NAV, at an attractive entry level, given its operational improvements.
OUE REIT as at 3.04 pm changed hands at 28 cents.
